Banks struggling with dated IT systems

By Jessica Yun

01 March 2018

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The global banking sector, which has benefited from its “inertia” for decades, is under cost pressure as it attempts to reconcile legacy IT systems with a newly digitised front end, says Ariel Investments.

Speaking in Sydney, Chicago-based Ariel Investments director of research for international and global equities Chaim Schneider said that banks are transforming “tremendously” as they shift offline bank branches to the online world.

“Banks are absolutely making a lot of investments in mobile, in adapting to the new paradigm, because clearly the new world around them is changing tremendously and rapidly,” Mr Schneider said.

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“But the problem is that banks were not designed for this way,” Mr Schneider added.

Many banks were still using IT architecture that could be up to 50 years old in a “coding language which was not designed for an omni-channel world.

The director said: “They have these back ends, these core banking platforms, that are sub-optimally established, and then they have this front end, where they’re investing heavily in digital and mobile and online banking, and they need to bridge the gap between the two.

“But in doing so, this patchwork comes at a significant cost. Part of it has to do with simply the infrastructure costs with making these investments, which are huge.”

A further cost-related pressure on banks was the open banking regime and the increased competition this would bring to the sector, the director added.

“Banks, more than anything else, benefit from inertia. And you can hope in some ways, this threat will be mitigated by other factors, but either way it’s a real threat challenging the costs of these institutions.”

Banks are also looking to “future-proof” their branch networks, Mr Schneider said.

“Effectively, banks around the world are taking steps to reshape the branch network to future-proof their branch network.

“But there are significant limits and constraints on their abilities to do so.”

He said that the closure of brick-and-mortar bank branches was often seen as a cost-cutting measure, but this was in fact hurting banks in other ways.

“Strange as this may seem, the majority of people around the world in country after country look at that bank that they may pass on their way to work every day and believe their cash, their deposits, are inside the vault in that bank,” Mr Schneider said.

“We all know the way banking systems work these days doesn’t exactly work that way. But that is truly ingrained in [the] mindset of people around the world.

“And what that means is when that bank branch closes, banks in that region sometimes have a problem sustaining those customer relationships among both retail customers as well as small businesses who just like the presence, the comfort, of driving by their bank on a regular basis.”

He also pointed to the “very important role” bank branches play as “deposit-gathering frameworks for banks”.

“The raw material for any bank is deposits. Without deposits, banks can’t make loans. And the branches play a mission-critical role in deposit gathering, in particular low-cost deposit gathering.